After the announcement and news on raising our first external round of capital, several budding African entrepreneurs have reached out to me through various social media channels asking, “Tesh, please could you share some tips on how you did it?”
Reflecting upon the same and the numerous congratulatory messages that came streaming in this past week made me think about the struggle of fundraising, and why it is indeed a great milestone for entrepreneurs. As much as the capital we have raised ($350k) for our startup, MarketForce, is very ‘small’ – compared to some counterparts across the globe – I have come to learn that less than 0.5% of startups globally get funded by either angel investors or VC’s(venture capitalists). In Africa, the statistics are worse!
This led me back to my dormant personal blog. I thought it would be a good time to revive it and share a few lessons picked up from our fundraising journey.
Why is it so hard to raise capital here? Founders argue of lack of investment appetite by investors for African founders and businesses, while investors argue of the lack of enough investable African-founded businesses. To a large extent, I believe both are right. I shall not go into the Expat vs African founders debate, but my comments around that hot topic are that; first, investors invest in people(not ideas), and majority of the investment decisions even in Africa are still made by Non-Africans. The vast majority of investment firms operating in Africa source funds from outside Africa and most make investment decisions outside Africa too. Second, a majority of African high-net-worth (potential) angel investors still do not consider tech investments when looking to grow their wealth. This leaves a significant gap in early stage funding as many entrepreneurs lack early believers/adopters – when it comes to investment – to bridge the gap to when they are ready for professional investors.
On the contrary, other entrepreneurs (especially in the Silicon Valley) are able to raise to the tune of $2M in pre-seed capital either with strong/proven founders or good ideas from both institutional and angel investors. In our case, Mesongo and I built MarketForce for at least one year before becoming ‘investable’, or rather before even starting to think about raising external capital. In fact, we started generating revenue less than 8 weeks into building this business.
It took us roughly 11 months and over 100 conversations with 76 potential investors to raise our seed round. How do I know this? Because we keep track of all the investors we speak to(through an excel sheet), and what they say, including the stage we are at with each one of them.
Do not be surprised. I came to learn that ours is not an exception, but the norm. Ken Njoroge of Cellulant said that it took him over 400 pitches with over 60 investors to raise their $47.5 Million Series C round in 2018. The exception when it comes to raising money in Africa only happens if you have either been a multi-exit entrepreneur like Iyinoluwa Aboyeji of Flutterwave and Andela, or you have numerous years of domain experience under your belt like Peter Njonjo of Twiga. Otherwise, it takes a lot of time!
The aim of writing this is to give some context into what worked for us, hoping it gives any upcoming African (technology) entrepreneur insights on how to get their first round of external capital. Here we go:
1. Traction is King! – Get your hands dirty from day one, investors love revenue and demonstration of progress e.g. product-market fit. Be a “Chini Ya Maji” startup as explained by Mark, until the time is right to go out there for external funding to fuel growth. The only exception to this are startups that cannot bootstrap their way to early traction; typically happens in hardware or other very capital intensive models like fintech. In this case, you have to be a man with a strong plan!
2. Tell a story – This sounds very cliche but it always takes more than just the numbers. You don’t have to tell a very sexy story, but you need to be able to explain; What is the impact of what you are building? Why you? Why now? We really struggled with this because we thought our traction was enough to lure and close an investor. We were absolutely wrong. As founders, we sometimes suffer from a bit of tunnel vision. We get so caught up in what we’re trying to do and what we need from the people around us to make it happen, we forget to flip the script and think about what those people need from us. Show investors what is in it for them. When we got our story right, conversations with investors became much easier.
3. Re-think your valuation – Be real, there is only one silicon valley. If you are not pitching to a Silicon Valley investor, then you might want to review your valuation. Watching the popular Shark Tank reality TV show and seeing the investable valuations and valuation drivers for the businesses that pitch on the show would be a great starting point. We raised our seed round as a convertible note at a $3 million valuation cap. With over $1 million in contracts/revenues closed, I think this was a pretty fair valuation. I choose to be transparent because I believe that if African entrepreneurs and our ecosystem are going to grow, it is paramount that we learn from each others successes and failures. Here is some fantastic insight into how to value your startup and how much equity you should give up at various stages.
4. Cast your net wide, and double down fast – Apply for as many relevant accelerators as possible, pitch whenever you get an opportunity for visibility, research and list down as many investors as possible who invest in your region and sector, and then talk to as many of them as possible. Then start narrowing down – not everyone will like you or your story, some will waste your time, be resilient, stomach the NO’s, pick up lessons where they exist, move on swiftly and boldly. Entrepreneurs can waste a lot of time engaging with investors, believing that they are able to invest, when they do not have any funds. Investors are frequently fundraising, but most do not tell the entrepreneur that they do not have funds available and will have to raise capital before they can actually invest. Many of these investors are seeking a pipeline of projects to aide their fundraising and use business ideas from contacts with entrepreneurs, often without their permission. The time entrepreneurs waste on what may turn out to be a wild goose chase, can damage the business itself and leave founders exhausted and frustrated.
5. Do not underestimate how much time it takes – Raising capital is a marketing project (you are selling your company’ shares), and it takes a ton of strategy, preparation, and work to pull it off. In our case, we agreed that I would focus on fundraising while Mesongo(my cofounder) would take up a chunk of my responsibilities and hold fort at the company. It was a great decision because I ended up spending half of my productive time preparing the company to be investor-ready(legal, structure, financial models etc), having coffee with investors and responding to their questions via emails/calls. I still wonder how solo founders are able to manage this excruciating process while still growing the business.
6. Lastly, up your game and seek help – Any of the above on their own is not enough, you need to show you are special. A startup’s potential lies in its founder’s exposure. You can read more on “African startups vs Startups in Africa” here, and why we still lag behind in fundraising. We need to up our game! Besides the strong internal team and resourceful advisors/mentors that we have, Jeremy Riro of Fie-Consult and Peter Ngunyi of Early Bird Venture Labs supported us a lot through the fundraising journey with professional advise around strategy, finance, human capital, legal, operations, negotiation, and many other intricacies, including thinking through the implications of every decision we needed to make as we chose the right investors and closed on the investment (Note: not all investors are right for you – the ideal investor is someone who not only has capital, but also has the experience or the network to help accelerate your startup in a way you could not do on your own). I dare to say that it is (almost) impossible to build and scale a company without such specialized support.
As I wind up, I would like to acknowledge the fact that the fund-raising path is not for everyone. Here’s a great article that should answer your question on “Should I Bootstrap Or Raise Capital?”
This is only the beginning for MarketForce. Now, I need to get back to work. All the best fellow African entrepreneur!